The big small business

Scott Bartley traces the growing pains and capital-raising strategies of technology super-star Orion Health.

Orion Health is a technology start-up from the days before technology start-ups were all the rage. Since its beginnings in 1993, the company, which sells software systems to hospitals and healthcare providers, has grown from four people in Auckland to more than 1200 spread across the world, with operating revenues of $164 million. Once labelled the darling of New Zealand’s software industry, it recently experienced the roller-coaster ride of listing on the New Zealand Stock Exchange.

Throughout it all, Ian McCrae, CEO and founder of the company, has been at the helm. And while the company has reached a scale that most business owners can only dream of, McCrae’s tale of capital shortages, the pressures of change and dealing with growth pains is something nearly all Kiwi business people can relate to.

The early days
For McCrae, a background in data network systems and designing corporate networks that allowed disparate computer systems to communicate, set him in good stead for what was to come. Orion’s beginnings were rooted in an Auckland District Health Board project McCrae was involved in to link some 50 green-screen IBM terminals scattered across the city’s hospitals. The success of that project led McCrae to win the Ministry of Health contract to link all New Zealand hospitals to a new national health index. Orion Health was born.

“Our software and the network connecting all the hospitals to each other and the Ministry was groundbreaking. That was our starting point,” explains McCrae.
Orion’s first official sale, outside the Ministry’s project, was to a hospital in Boston.

McCrae sold the software for just $5000, but over time the price went up as more customers came on board, demand increased and he realised the value of what he’d developed.

“Initially, in North America, we sold to small regional hospitals. They were pretty much the only people who’d actually see us, because we were a small Kiwi company. But as we grew, we started moving up the food chain.”

Orion’s growth in North America got a big boost when NZTE set up the first of what was to become a series of ‘Beachheads’ around the world and helped connect McCrae and Orion Health to a network of advisers and others willing to help springboard budding Kiwi companies into new markets.

From then growth happened quickly. Struggling to cope with the speed of it, McCrae put a board in place to provide direction, support and a broader skills base.

“Even though I owned most of the company, having that level of governance was rather a strange concept to me at first. You’re the majority shareholder and yet you have a board telling you what to do.

“As a business grows, you have these time periods where the company changes dramatically, and that’s challenging as the CEO because you have to change the way you act and think.”

One of the first challenges was simply getting past 20 employees, he says. “Up until then, you know everything that’s going on; you know all the faces and what they can do. But after 20 people you just can’t do that. It’s overload.

“This phenomena of needing to change management style occurred again several times as the company grew.”

Fuelling growth
With growth, comes a demand for funding. Before 2004, outside investment in Orion was fairly modest, but when the North American push called for a large cash injection, one of Orion’s board members, Andrew “Clem” Clements, became the first external investor.

At the time, Clements was running a small private equity firm that he says would be more akin to what’s called an angel, or early stage, investment firm these days. Clements’ company, Zeus Management, invested some $2 million to $3 million in Orion, but Clements doesn’t consider himself a venture capitalist in the traditional sense.
“We don’t invest in these companies because we’re looking to do a five year invest and then flip out. We invest because we think they’re great companies. Our investment philosophy is simple: find great people doing good things in a space we like. We ended up liking health a lot.”

To continue Orion’s growth plans, further investment was sought and found in 2007 from Pioneer Capital, where co-founders and directors Matthew Houtman and Randal Barrett were also attracted by Orion’s prospects.

“This is a growth equity story as opposed to the leveraged private equity story many people think of when discussing private equity, especially overseas,” says Houtman. “A growth equity story is more about, ‘here’s a company with really strong growth prospects but is not necessarily stable cashflow positive’, which means they can’t get bank funding, so they need a funding partner to come alongside them for when things go well and when things go less well.”

McCrae expands openly on how Pioneer and Zeus Management helped grow the company.

“Through the years I ended up with a lot of debt. It got to a point where my wife wanted to pay off our credit card every month instead of worrying about how close we were to the limit. This had gone on for years. Looking back there was a decade or more where we just didn’t have any money.

“Having Clem and Pioneer come in and provide that funding really allowed us to get on with things and grow the company instead of worrying about the credit card.”

Pragmatic approach
McCrae views the ebbs and flows of investment pragmatically – from the longer term ‘growth funders’ during the early and mid years to the more action packed levels of investment of 2014, which led to a $25 million capital raise followed closely by the $125 million IPO on the Stock Exchange.

“I take a logical approach to outside help. It starts off just you and a few others; then as it grows more and more people get involved. People take shareholdings and then you have a board that actually ends up telling you what to do. But ultimately it’s good for the growth of the company so you just have to be very practical about it and listen to advice.

“Up to the beginning of last year we’d raised $8 million in the company’s history. But about 18 months ago the health industry began a period of complete transformation and will, in a decade’s time, have become a fundamentally different industry. Our customers want to move from buying perpetual licenses to having up-to-the-minute software paid for through a monthly subscription. When you move from one to the other it affects your revenues and cashflow, so we needed to find significant funds to fund that transition.”

McCrae sums up Orion’s approach to business by pointing out that big companies need to act quickly and remain innovative on the world stage to stay ahead of the game, especially when entering periods of massive change.

“Our recent capital raising efforts have been focused on R&D so we can remain agile. You never really think you’re a big company. We have competitors with US$2 to 4 billion in revenue, so throughout the last decade or two, we’ve always been the little guy.

“It sounds bizarre, but even today we consider ourselves a small company; and all small companies need capital and support to grow.”

Scott Bartley is a Tauranga-based freelance business and technology journalist. www.linkedin.com/in/scbartley